The Protection Distributors Group (PDG) will tell the Financial Conduct Authority (FCA) that it believes the protection market “works well“ and that indemnity commission “supports distribution“.
The trade body said it will make the submissions to the regulator in response to the FCA’s pure protection market review announced yesterday.
The PDG added it supported looking into the protection market in its own right, but was concerned about the uncertainty it may bring during the process and argued the review could be expanded to include business protection sales and even private medical insurance (PMI).
The FCA announced yesterday that it would be conducting a review into the operation of the pure protection market including commission structures, loaded commission and the shrinking insurer market.
And Health & Protection also reported yesterday that advisers had applauded the FCA investigation, citing commission levels and indemnity structures as a key scourge of fairness which also affected client outcomes.
Commission structures, including loaded commission, were one of the key issues raised by the FCA while the regulator added it would consider other activities “not in the directly proposed scope of the market study“ such as cross-selling products.
‘Not lumping it with general insurance’
PDG chairperson Neil McCarthy (pictured) said today: “The PDG welcomes the fact that at long last the FCA is looking at protection specifically and not lumping it in with general insurance.”
McCarthy noted: “The market study is starting ‘with an open mind as to whether we find evidence of harm’ and is not currently defining a start date, only an intention to launch the market study in the financial year 2024/2025.
“This gives ample opportunity for all relevant parties to comment accordingly.”
But he added: “We would however note that while the review is ongoing, all who would invest in our market face great uncertainty.
“We would therefore urge the FCA to keep this process as short as is fair and practicable.”
McCarthy also acknowledged that this deep dive into the protection market was the first time to the body’s knowledge that any of the various UK financial regulators since 1986 had done this.
“In context this could be seen as part of the wider current work in the pure protection market including product oversight and governance thematic review together with ongoing work on the price and value outcomes that is all part of the FCA’s focus to ensure Consumer Duty is embedded by all manufacturers and distributors operating in the protection market,” McCarthy continued.
“The PDG will be reinforcing the point that fundamentally the protection market works well, and that indemnity commission supports distribution and allows many sales models to operate across the product areas, whilst supporting access to, and the needs of, diverse customers.
“In addition, we will make clear that it is very wrong to suppose all re-broking of policies is done just to generate commission – changes of client circumstance and new product developments are entirely legitimate reasons to replace and update policies.”
McCarthy noted that a number of the areas covered in the terms of reference (ToR) were raised in November last year by Lisa Sturley, head of market interventions, insurance supervision at the FCA in her speech.
In that speech, the PDG specifically commented on:
- Loaded premiums being unfair to consumers
- Clarity on the blurring of boundaries between advice and non-advised sales
- Customers getting the consistent high-quality support they need at the point of claim
- The identification and treatment of vulnerable customers through the lifetime of a protection policy
Expand to other products
The ToR focuses on the distribution of pure protection products – term, income protection, critical illness, whole of life including guaranteed acceptance over-50s plans, which are purchased by individuals, specifically excluding workplace group policies.
McCarthy suggested there could be value in the study being widened to other products.
He said: “On initial reading the PDG can see value in understanding the same issues facing micro businesses, business protection sales and possibly the sale of PMI.”
The FCA references three specific concerns in its outline:
- Competitive pressures in the market may be weakening due to the recent exit of several insurers
- Some pure protection products may not provide fair value to customers
- Design of commission arrangements may not always support the delivery of fair value.
McCarthy said: “In the PDG’s view clarity of the sales process and its remuneration is part of a healthy market where the consumer can buy products and services which meet their need and provide fair value.
“And finally, long term products need lifetime engagement to reinforce the product features, claims opportunities and added value services and we would urge insurers to get on with the long talked of delivery of annual benefit statements to consumers.”
Two years of warnings
Commission has been a major issue for more than two years since the FCA launched its product value rules and announced the introduction of the Consumer Duty.
The regulator has repeatedly warned firms about the potential for commission levels to skew industry practice and hurt consumers.
In August 2021 the FCA flagged commission as a key target within assessing product value.
And in May 2022 it pressured insurers to again consider adviser commission levels as part of their Consumer Duty implementation.
Three months later it told insurers that it expected them to tell advisers and distributors how their commission affects the value of the product for consumers.
Advisers and other industry leaders have also raised concerns, particularly around loaded premiums which provide a higher commission to the intermediary.
As far back as December 2021 Cura Financial Services managing director Alan Knowles and industry veteran Johnny Timpson said they believed loaded premiums were incompatible with the new rules.
In July 2022 this was also echoed by St James’ Place divisional director Tony Müdd who said the issue was “bordering on a stain on the industry”.
And in December that year Assured Futures commercial director Ian Sawyer said commission models in the protection industry were “ridiculous” and incentivised poor behaviour.
In March 2023 Aviva managing director of protection Fran Bruce told Health & Protection it was bringing firms with loaded premiums “back into line”.
That month Legal & General Retail managing director for distribution Ali Crossley added the insurer had not told any firms they must reduce, or end loaded premiums, but said it had declined deals where it thought the commission level was too high.
And in the August 2023, Guardian CEO Katya MacLean told Health & Protection the insurer had not chosen to end any relationships with its distribution network for this reason.